By Kevin Yao
BEIJING (Reuters) - China's new leaders have adopted a greater tolerance for a slowdown in the economy than their predecessors and are likely to allow quarterly growth to slip as far as 7 percent before triggering fresh stimulus to lift activity, sources say.
The government of President Xi Jinping and Premier Li Keqiang has flagged for some time that the rapid GDP growth of the past three decades needed to shift down a gear as the economy moves towards consumer-led expansion.
But it was not clear where Xi and Li would draw the line in the sand, leaving financial markets guessing over how the government would respond to successively weak economic data.
Government economists at top think tanks involved in policy discussions say that line is likely to be 7 percent, compared with their predecessors who implicitly observed a level of 7.5 percent to 8 percent.
"The new leaders' tolerance of economic slowdown is definitely higher than their predecessors," said Zhang Yongjun, senior economist at China Center for International Economic Exchanges (CCIEE), a well-connected think-tank in Beijing.
"They understand that China's potential growth rate has been falling. The minimum growth rate that they can tolerate has been shifted downward and it's likely to be 7 percent," he said.
That does not mean Xi and Li have abandoned the mandated annual growth target of 7.5 percent. If that appears to be under threat, they will act, the government economists say.
Economic growth slipped to 7.7 percent in the first quarter compared with a year earlier, down from a rate of 7.9 percent in the previous three-month period. Weak data in April and signs of sluggish factory activity in May have raised concerns the economy could slow further in the current quarter.
China is due to report May data in the next week.
Few analysts believe growth will slip below 7 percent in the current quarter and most agree the full-year target is achievable as the central bank already has relatively loose monetary policy.
But the likely line in the sand by Xi and Li gives a clearer indication to financial markets that a slowdown would have to be more dramatic before they endorsed fresh stimulus measures and it also shows the extent to which they are focusing on efforts to restructure the economy. Previously, many investors had assumed that the level of tolerance would be 7.5 percent.
China is undergoing a massive shift as Beijing tries to re-engineer the economy more towards domestic consumption and away from exports- and investment-led growth.
After three decades of double-digit expansion that saw China zoom into second place in the rankings of the world's biggest economies, growth slowed dramatically in 2012 to 7.8 percent - the slowest pace in 13 years.
"We should not blindly pursue GDP growth," Li said in November when he was vice premier. "The economy is likely to experience a modest-speed period as it's very difficult to maintain double-digit rates in the long run."
The government economists said the previous leadership of Hu Jintao and Wen Jiabao, who handed over the reins in March, had implicitly observed a minimum level of growth at 7.5 percent to 8 percent. They triggered government stimulus by fast-tracking infrastructure projects when annual growth slipped to 7.6 percent and 7.4 percent in the second and third quarters of 2012, respectively.
"They (leaders) don't need to panic as long as the employment situation remains stable," said Zhu Baoliang, chief economist at the State Information Center, an influential government think-tank in Beijing. "If the employment situation worsens, they may have to take action."
The economy created 3.4 million new jobs in the first quarter, slightly higher than a year earlier thanks to the services sector, labor ministry data shows.
However, a record high of nearly 7 million college graduates are expected to flock to the jobs market this year, up by 190,000 from last year, according to Chinese media.
In addition, demand for migrant workers is showing signs of weakening based on data from the National Bureau of Statistics, which shows that the average wage rise in 2012 of 11.8 percent was a sharp slowdown from 21.2 percent in 2011.
Chinese media has reported labor shortages in coastal cities have eased and an official survey conducted in 84 major cities in the first quarter of 2013 showed demand for workers had fallen 2.9 percent from a year earlier.
That partly explains the urgency among China's leaders to push ahead with economic reform. Xi has taken charge of drawing up ambitious plans to transform the economy after a consensus was reached among the country's leaders that reform was the only way to put the economy on a more sustainable footing, sources told Reuters in May.
The new leadership is also more cautious about adopting new stimulus measures because of the debt overhang left by the 4 trillion yuan package unleashed during the global financial crisis in 2008.
The lending boom it sparked fuelled a property bubble and left local governments under a pile of debt. Ratings agency Fitch estimates local government debt at 13 trillion yuan, or a quarter of GDP. Government data puts the number at 10.7 trillion yuan.
The new leaders are keen to reform the economy, said Zhang Bin, senior economist at the Chinese Academy of Social Sciences (CASS), another top think-tank.
"They are less keen to stimulate the economy," Zhang said.
Since taking office in March, Premier Li has been pushing efforts to cut red-tape and reduce the government's role in the economy while supporting market competition.
"We will let the market play the basic role in allocating resources and strengthen the internal impetus of economic growth," Li said in May.
The reforms are due to be unveiled at a key Communist Party meeting later this year and are expected to include liberalizing interest rates and allowing greater population mobility to let market forces play a bigger role in the economy.
If the economy does stumble though, analysts said the government is likely to adopt stimulus measures such as boosting investment in railways, roads and airports.
"The fact that they are tolerating slower growth does not mean that they will let growth go into free fall," said Yiping Huang, an economist at Barclays Capital in Hong Kong.
"If the (quarterly) number drops below 7 percent, I think they will probably be more concerned. It's more about market confidence."
(Editing by Neil Fullick)